Economic and Market Commentary

Outlook for Public Credit Markets: Value Still to Be Found

PIMCO CIO Global Credit Mark Kiesel discusses how credit markets reacted in March and where PIMCO is seeking opportunities now.

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Mark Kiesel: So we're going through something truly unprecedented in terms of the sudden stop in the global economy. One of the sharpest contractions we'll see since World War II. The positive news is that we've really had something truly unprecedented in terms of the policy response. The Fed has expanded its balance sheet 10% of GDP in two months. I think what we saw in March was a market that was significantly over sold. It was one of the worst markets I had seen in 12 years. So high quality credit got extremely cheap. The valuations got attractive. The bottom line is that the US market looks the most attractive of all the markets in publicly traded credit right now. The investment grade market has that backstop. If you look at the hedged deals, if you look at people in Japan or people in Asia hedging the currency risk back, or if you look at Europeans, buying US credit and hedging the currency risk back. The outright yields after foreign hedging costs are as high as they've been in four years. We’re being selective in terms of favoring things like utilities, telecom, cable, cell towers, healthcare, pharmaceuticals, technology companies. We want to buy companies where the underlying credit fundamentals are stable to improving and the companies that can handle a second wave or a disappointment, a setback. The areas that we're most cautious on remain autos, energy, retail, chemicals. In terms of lower-quality credit, we're still a little bit cautious on high yield. We think that basically you're going to get high single-digit, potentially even low double-digit defaults. So big picture, we want to favor developed markets over emerging in general. We want to favor more investment grade exposure versus high yield and bank loans.

I think over the next six to 12 months, really, it's going to be whether we get a second wave and then the vaccine. And then how engaged will policymakers be, in terms of supporting the market? Will monetary and fiscal continue to bridge that shutdown risk, which it looks like in the US they're doing. But that can change also. So, I think we have to be alert to that risk.

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All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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CMR2020-0601-1200362

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